Obama Seeks to Turn U.S. Bank Overhaul Into G-20 Momentum on Capital Rule
President Barack Obama enters the Group of 20 summit today with added momentum for his push to increase bank capital standards: congressional action overhauling U.S. financial regulations.
Obama arrived in Canada yesterday, the same day U.S. lawmakers agreed on a compromise package of rules that would toughen capital standards for U.S. financial companies. The deal strengthens Obama’s hand as G-20 leaders meet in Toronto this afternoon following a gathering of the Group of Eight in Huntsville, Ontario, that will wrap up today.
“The progress that the U.S. has made will be important in driving the world not just to agreements here but to conclusions on financial regulations within the kind of timeframe we’ve been looking at,” Canadian Prime Minister Stephen Harper told reporters yesterday in Huntsville.
Canadian officials today said a consensus on taxing financial institutions was unlikely to emerge from the summit. Harper spokesman Dimitri Soudas said each country can take their own approach on the issue while committing to economic stimulus and deficit reduction.
Harper “will encourage these countries to commit to half their fiscal deficits by 2013 and put their debt-to-GDP ratios in a downward path, a downward trajectory by 2016,” Soudas told reporters in Huntsville.
G-20 leaders have been split over how best to implement new standards, while agreeing on the general need for changes to avoid a repeat of the 2008 financial crisis. They also face opposition from banking officials such as BNP Paribas SA Chief Executive Officer Baudoin Prot, who warned that raising requirements too quickly would risk choking off lending.
“We had to show leadership to deal with the excessive risk-taking and the lack of adequate capital standards,” said Stuart Eizenstat, former deputy Treasury secretary under President Bill Clinton. “Toronto is not going to be able to come up with 20 countries” with “one set of international standards but it will get us pointed in that direction so that at Seoul in November, there is really a good chance of an agreement.”
The focus yesterday at the G-8 was on an initiative to promote maternal and child health in poor countries. Harper late yesterday announced that the group -- which includes Japan, Canada, the U.K., France, the U.S., Italy, Germany and Russia -- had agreed to commit $5 billion over five years.
There was also talk of financial matters. In a preview of what he plans to press in Toronto, Obama talked about bank capital, an administration official said. And leaders including Harper and German Chancellor Angela Merkel congratulated Obama on the financial legislation, said the official, who briefed reporters on the condition of anonymity.
Still, European leaders deflect any conversations about bank capital by bringing up regulation of tax havens, hedge funds, credit rating companies and compensation, U.S. officials said this month on condition of anonymity.
The G-20 pledged in Pittsburgh to strengthen capital standards and find a way to make banks bear the costs of any government assistance. Earlier this month in Busan, South Korea, finance ministers affirmed these commitments and their support for work by the Basel Committee on Banking Supervision.
Bank Levy Proposal
The U.S. has tried to broker a deal on bank levies that would bridge the gap among G-20 members. Obama has proposed a limited-duration levy that would recoup taxpayer costs of the $700 billion Troubled Asset Relief Program, currently estimated at about $105 billion. The U.K. wants a revenue-raising tax on banks to help close its budget deficit, while Canada and Japan have been wary of any action on those lines.
“We need to work with our global partners to ensure we have adequate capital to avoid another meltdown,” said Daniel Alpert, managing partner of New York-based Westwood Capital, in an interview with Bloomberg Television. “European lenders have nowhere near enough of a capital cushion.”
European leaders such as Merkel and French President Nicolas Sarkozy have said any new capital requirements need a lengthy transition period. Merkel didn’t mention capital requirements yesterday, instead reiterating German support for an international bank levy even as she acknowledged it was unlikely to gain widespread backing.
“It’s our firm opinion that the financial markets have to pay part of the cost of the crisis and take precautions,” Merkel said. “We will lobby for this intensely once again, but realistically we have to see that not only industrial countries are skeptical, but also to some extent emerging nations.”
The U.S. oversight bill allows regulators to cap the amount of leverage banks can take on and requires foreign banks operating in the U.S. to hold as much capital as their domestic competition. It doesn’t include a bank levy.
Banks stocks rallied yesterday, with the Standard & Poor’s 500 Financials Index, whose 79 companies include JPMorgan Chase & Co. and Goldman Sachs Group Inc., rising 2.8 percent.
Obama and Treasury Secretary Timothy F. Geithner are trying to bridge differences between bank-tax supporters such as England and Germany and those opposed, including Canada, China and Brazil. The U.S. will push for a deal in which countries agree on the principle of shielding taxpayers from bank rescues, while allowing each nation to choose their own approach.
Russia opposes proposals to impose a tax on banks, said Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev. Speaking to reporters yesterday, Dvorkovich said G-20 leaders were also unlikely to agree to tax financial transactions.
“A one-size-fits-all approach may not be productive,” said Kazuo Kodama, a spokesman for Japan’s Ministry of Foreign Affairs, at a press conference in Toronto. He declined to give Prime Minister Naoto Kan’s position on the bank tax.
Leaders will also be focused on the issue of sustaining the global economic recovery while coping with rising debt burdens. Obama is pushing the G-20 to focus first on economic growth, rather than on budget cuts that might hinder demand. Nations such as Germany and the U.K. are tightening budgets in an effort to increase investor confidence after the debt crisis in Greece.
A European official, speaking to reporters on condition of anonymity, said there’s a consensus within the G-8 that stimulus withdrawal must be phased over time and start in 2011 except for the most fragile economies. The official said the debate focuses on how steep the deficit reductions should be.
“You have to continue to support the recovery and at the same time you have to continue to focus on markets’ concerns and for your own interest you have to normalize the debt and the deficit situation,” OECD Secretary General Angel Gurria said in an interview with Bloomberg Television yesterday. “Europe is putting its act together.”
U.S. Treasuries are having their best year since 1995, returning 5 percent through June 24, according to Bank of America Merrill Lynch index data, as investors seek alternatives to Europe, where Greece and Spain had their credit ratings downgraded amid growing budget deficits.